Business — Banking — Management — Marketing & Sales

The main factors/elements of a compensation policy

There are five key elements in good compensation plans for banks:

— First the level of the wages that have to be compared with the level of the labor costs, but also with the competitiveness of the offered salaries, on the labour market, for each function.

— Second, the equity of the provided wages. Here there is need for a weighing of the posts, using a qualification and job classification method, according to required competencies and responsibilities that have to be assumed at every place.

— Third, the level of the differentiation between posts and among each functions. If one does not want to induce a tendency to try to leave the functions to increase the salary, the compensation plan should be flexible enough so that staff in lower ranked positions can get higher overall compensation than higher ranked managers.

— Fourth, there should be room for progressions, so that every member of the staff could have the hope that his (or her) efforts could result in an increase of his (or her) salary.

— Fifth, all key officers (at least) should have some of their compensation specifically linked to their own activity (efforts) and results and, eventually, to the performance (profitability, level of risks,…) of the bank (referring to its long-term interests). It’s a matter of equity and a condition for the staff’s motivation.

The question of the level of salaries

Compensation should be organised so that the bank is paying competitively for the task performed. Many banks remain way behind other financial and non-financial businesses in providing compensation plans that emphasise keeping key managers, but most bankers realise now that banks are not serving their long term strategic interest by relatively underpaying their key staff. To keep key performers, a bank must pay as much as (or more than) other financial firms or provide appropriate incentives. Furthermore, insufficient salaries encourage the development of underground economy (secondary activities of the staff).

Interestingly enough, banks that pay productive managers well need fewer managers and have lower salary and benefit global expenses relative to assets, revenues, and profits. Non performing managers do not stay with such banks.

Inter-individual differences among salaries

The remuneration policy pursued by a company is reflected in the nature of the aspects that are remunerated and in the way in which the remuneration is determined.

This policy is characterised by options with respect to:

— the levels (average) of remuneration accorded,

— the overall spread of wages and salaries,

— the procedure for awarding and particular level of earnings (see the following table setting out criteria for differentiation)… and the variability of remuneration depending on three types of criteria (for a more complete description, see table 1):

— tasks performed (variations of remuneration from one job to another, proportion of overlap between staff holding different positions[1]):

— nature of the functions (complexity),

— levels of responsibility,

— characteristics of the staff (variations in remuneration for employees performing similar functions: central trend and dispersion) :

— age / seniority,

— competence,

— results:

— individual,

— collective,

— the pattern of the graphs of individual advancement (speed of increases at different points in the career) and differentiation to take account of the individual potential of employees, etc.

Table 1. The various criteria for wage and salary differentiation

Reference criteria	Aspects of the corresponding remuneration	Tools or approaches required	Pitfalls, risks and limits
Complexity and responsibility of the post	Basic salary	Job classification	Needs for a cumbersome rating system (which may create rigidities)
Loyalty to the Company	«Points» for seniority or automatic advancement (de facto)	See collective wage and salary conventions or agreements	Demotivating effect (in every sense of the term)… on young staff
Ability to cope with duties	Increases (progression between salary steps)	See collective wage and salary conventions or agreements	Possible drift into a sinecure situation
Value on employment market	Personal «points»	Enquiry into remuneration/career graphs	«Catch-all points» awarded by procedures which lack uniformity; variations are not carefully thought
Stenuous and demanding working conditions	Compensatory bonuses	Study of workplaces in terms of safety and hygiene	Perpetuates intolerable situations
Assistance in coping with private events	Exceptional bonuses	See collective wage and salary conventions or agreements	Are the social benefits fully justified (real needs, equity)?
Recognition of efforts made and sharing of profits (equity and stimulation)	Profit-share varying as a function of contribution	— Individual commissions awarded on a merit basis — Share in corporate earnings	Objectivity?(Guarantee against arbitrary action)

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[1] The fewer the opportunities for promotion, the more desirable it may be to provide rising earnings for personnel, without the need to change from one category to another.

Tagged as: Motivation